When Simone Griffin was young, she would watch her grandmother pay the bills on the first of every month. “My grandmother would talk to me about the importance of saving, paying bills on time, and monitoring spending,†the Atlanta-based executive director for homeownership organization HomeFree-USA says. Those conversations paid off, as Griffin now has an 801 credit score. “Credit is a barometer of my goal of building wealth–it tells me if I’m on the right path,†she says.
Griffin, 33, paid off all her consumer debts last year. She also surrounds herself with people whose values are similar to hers, such as her friend Jade Brawley, a Washington, D.C.-based schoolteacher who is working to improve her credit score, which is in the mid-700s. “Before I make a purchase, I plan for how I’m going to pay it off,†says Brawley, 32. For Griffin, having someone mirror her own money-management philosophy motivates her to reach her financial goals.
Achieving A+ credit can pay off in the form of lower interest rates, faster loan decisions, and easier access to capital. The most widely used credit score is Fair Isaac Corp.’s FICO score, which ranges from 300 to 850. “Excellent credit is whatever credit score is necessary to get the best deal that a lender has to offer,†says John Ulzheimer, president of consumer education at credit monitoring website SmartCredit.com. That number
can vary not only by lender, but according to the type of loan a consumer is applying for. For example, lenders awarding 30-year fixed-rate mortgages might consider a 760 FICO score to be A+, while those offering 36-month auto loans might consider a consumer with a 720 score or above to have excellent credit, says Barry Paperno, consumer operations manager for myFICO.com. Currently, you’ll likely qualify for the best rates for any type of big-ticket purchase if you have a score of about 760 or above, experts say.(Continued on next page)
According to Fair Isaac Corp., the number of people with excellent credit has decreased since the recession. In April 2008, 18.7% of the population had FICO scores of 800 and above, while in April 2010, only 17.9% had that distinction. Another 19.5% of Americans had FICO scores between 750 and 799 in April 2010. The median FICO score has been about 711 since April 2010, says Paperno. During that same period, those with low credit scores increased, with 35% of Americans having FICO scores below 650, up from 33.7% of Americans in 2008.
It’s easier to achieve excellent credit if you diligently manage your credit and don’t fall into any debt traps along the way. For those with a spotty track record, it typically takes between three and seven years to rebuild your score unless it’s a personal bankruptcy, which will take 10 years to fall off your credit report, Ulzheimer says.
For example, if a consumer’s credit score dropped to the 500s, it might take a couple of years to get the score to the 600s or lower 700s. However, it might take seven to 10 years for that same person to get up to 780 because enough time would have to pass for any negative information to fall off the credit report. “A 780 is an elite credit score, and if you want an elite credit score, you’ve got to have an elite credit report–which means you can’t have anything negative on it,†Ulzheimer adds.
The first step you should take is to scrutinize your credit report. “When you get a copy of your report and score, the report will tell you the main reasons your score’s not higher,†says Tom Quinn, credit score expert for Credit.com. You can request a free copy at Annualcreditreport.com. If the biggest factor is high credit card balances, start paying those down aggressively.
Likewise, if late payment is the culprit, your score will gradually rise as the late payment ages, provided you don’t continue to make more late payments and you keep low levels of credit indebtedness.
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Some credit improvement steps will have a greater effect than others:
Always pay on time. Paying on time is the single most important factor in having a good credit score. Even a single recently reported late payment can have a substantial effect on your credit score.
Know which loans count the most. Credit obligations aren’t all weighted the same. Revolving debt, such as credit cards, is considered riskier because of the likelihood of getting behind in payments than installment debt, such as mortgages and auto loans. As a result, a person with one installment loan and a lot of credit card debt might have a lower credit score than someone with multiple installment loans and little credit card debt. “I personally have over $800,000 of installment debt with a mortgage, a second mortgage, and a rental house,†says Ulzheimer. “But I have zero credit card debt, and my lowest credit score is 809. If I had that much credit card debt, my score would be in the 400s.†If you pay off a credit card, you may see a bigger jump in your credit score than if you finish paying off an installment loan.
Keep revolving debt to a minimum. Since the FICO score looks at the amount of revolving debt you have in proportion to the amount of revolving credit available, you can have an excellent credit score while maintaining loan balances, as long as you’re nowhere near maxing out your available credit. Although it’s best to pay
credit card balances in full each month, the ideal amount to owe is less than 10% of the amount of revolving credit that you have available. If you’ve done the work to get out of debt, don’t make new balances just to try to move up the FICO ladder. But it’s a good idea to keep credit cards active by charging small amounts regularly and paying them off by the next billing date.Keep new accounts to a minimum. While you may be able to save a few dollars with a 10% discount by opening that retail credit card, you can reduce your chances of having A+ credit since the presence of recently opened accounts can lower your score. “You should really think long term,†says Quinn. “Do I really need that 10% discount today when I’m going to be applying for a car loan in the near future and I want to make sure my credit is as good as it can be for that bigger purchase?â€
Getting an A+ score requires habitual sound financial practices. “If you want a 780 or 800 FICO score, you better have perfect credit, which means no delinquencies, nothing negative, credit card debt that is at a very low balance, and a well-aged credit report,†says Ulzheimer. “If you can combine all those things, you’re in good shape.â€